The Handling of Valuation Reserves
In both the statement of affairs and the realization and liquidation statement the handling of valuation reserves presents some difficulty. Either they must be included among the liabilities, which is awkward inasmuch as they cannot be shown as belonging to any of the classes of creditors, or the asset value as set up in the Book Value column must be the value after deducting the reserve therefrom. This latter method, which seems to present the least difficulties and raise the fewest objections, is the one followed here.
Illustration of Realization and Liquidation Statement
Problem. The Kay Corporation became embarrassed because of the tying up of current funds in fixed properties. A friendly receiver was appointed to operate the plant until the assets could be realized upon sufficiently to reduce the most pressing of the claims against the insolvent corporation. At the time the receiver took possession, the balance sheet of the company showed as follows, in summarized form:
Kay Corporation
Balance Sheet
| Assets | Liabilities and Capital | ||
| Cash | $ 4,000.00 | Notes Payable | $ 80,000.00 |
| Accounts Receivable | 120,000.00 | Accounts Payable | 110,000.00 |
| Merchandise | 60,000.00 | Accrued Expenses | 14,000.00 |
| Other Property | 500,000.00 | Bonds Payable | 200,000.00 |
| Capital Stock | 250,000.00 | ||
| Surplus | 30,000.00 | ||
| $684,000.00 | $684,000.00 | ||
A summary of the receiver’s transactions showed that he made sales of $131,000, of which $51,000 were for cash. He purchased $70,000 worth of merchandise for which he paid $12,500 cash, $25,000 in notes of the corporation, and the rest was carried on account. He bought other property for $20,000, giving therefor $10,000 cash and $10,000 notes. He collected $100,000 cash from customers and wrote off $25,000 as uncollectible. Other property carried on the books at $75,000 was sold for $69,000 cash. He collected from rentals $1,000. Selling expenses amounted to $10,000 and the receiver’s administrative expenses were $7,500, both of which were paid. Of the liabilities he liquidated $70,000 of notes payable and $100,500 of accounts payable. All the accrued expenses were paid. The inventory of merchandise was $20,000 when the receiver turned the property back to the owners.
Set up a realization and liquidation statement and receiver’s cash summary to show the receiver’s stewardship and result of his operations.
Solution
Kay Corporation
Realization and Liquidation Account